A cost-cutting project will decrease costs by $37,000 a year.The annual depreciation on the project's fixed assets will be $2,750 and the tax rate is 21 percent.What is the amount of the change in the firm's operating cash flow resulting from this project?

Question

Quizplus · Accepted Answer

The change in operating cash flow is calculated as the cost savings minus taxes on the savings plus the tax shield from depreciation. The tax savings is $37,000 * (1 - 0.21) = $29,230. The tax shield from depreciation is $2,750 * 0.21 = $577.50. Adding these gives $29,230 + $577.50 = $29,807.50.

A Cost-Cutting Project Will Decrease Costs by $37,000 a Year